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The most

ing Cycle and the Implications for Monetary

bleeding, free their assets and personnel to go

Policy," in World Economic Outlook: Housing and the

where they can add value, and make room for

effective and

Business Cycle (April 2008), ch. 3, p. 21, caption to

firms with better entrepreneurial ideas--is as

fig. 3.12.

appropriate form

relevant as ever. A financial market in which

of business

4. William R. Emmons, "The Mortgage Crisis: Let

failed enterprises like Freddie Mac or AIG are

Markets Work, But Compensate the Truly Needy,"

never shut down is like an American Idol con-

regulation is

Regional Economist (July 2008), http://www.stlouis

test in which the poorest singers never go

fed.org/publications/re/2008/c/pages/mortgage.ht

regulation by

home. The closure of Lehman Brothers (and

ml.

the near-closure of Merrill Lynch), by raising

profit and loss.

5. John Berlau, "The Subprime FHA," Wall Street

the interest rate that the market charges to

Journal (October 15, 2007), http://cei.org/gencon

highly leveraged investment banks, forced

/019,06195.cfm.

Goldman Sachs and Morgan Stanley to

6. Ben S. Bernanke, "The Community Reinvest-

change their business models drastically. The

ment Act: Its Evolution and New Challenges,"

most effective and appropriate form of busi-

(March 30, 2007), http://www.federalreserve.gov/

ness regulation is regulation by profit and loss.

newsevents/speech/Bernanke20070330a.htm.

The long-term remedy for the severely mis-

7. Dennis Sewell, "Clinton Democrats Are to Blame

taken government monetary and regulatory

for the Credit Crunch," Spectator (October 1, 2008),

policies that have produced the current finan-

http://www.spectator.co.uk/the-magazine/fea

cial train wreck is similar. We need to identify

tures/2189196/part_3/clinton-democrats-are-to-

and undo policies that distort housing and

blame-for-the-credit-crunch.thtml.

financial markets, and dismantle failed agen-

8.  Bernanke, "The Community Reinvestment

cies whose missions require them to distort

Act."

markets. We should be guided by recognizing

the two chief errors that have been made.

9. Russell Roberts, "How Government Stoked the

Cheap-money policies by the Federal Reserve

Mania," Wall Street Journal (October 3, 2008), http:

//online.wsj.com/article/SB122298982558700341.

System do not produce a sustainable prosper-

html?mod=special_page_campaign2008_most-

ity. Hiding the cost of mortgage subsidies off-

pop.

budget, as by imposing affordable housing

regulatory mandates on banks and by provid-

10. Wayne Barrett, "Andrew Cuomo and Fannie and

Freddie: How the Youngest Housing and Urban

ing implicit taxpayer guarantees on Fannie

Development Secretary in History Gave Birth to the

Mae and Freddie Mac bonds, does not give us

Mortgage Crisis," Village Voice (August 5, 2008), http:

more housing at nobody's expense.

//www.villagevoice.com/2008-08-05/news/how-

andrew-cuomo-gave-birth-to-the-crisis-at-fannie-

mae-and-freddie-mac/1.

Notes

11. "Official Cites Risks of Fannie, Freddie," Los

Angeles Times (March 11, 2003), http://articles.la

1. Federal Reserve Bank of St. Louis FRED data-

times.com/2003/mar/11/business/fi-freddie11.

base, series FINSAL and REALLN, year-over-year

percentage changes, http://research.stlouisfed.org/

12. The Treasury Department's Views on the Regulation

fred2/series/FINSAL?cid=106 and http://research.

of Government Sponsored Enterprises: Hearing Before the

stlouisfed.org/fred2/series/REALLN?cid=100. My

Committee on Financial Services, U.S. House of

thanks to George Selgin for drawing my attention

Representatives, 108th Congress, 1st Session

to these numbers.

(September 10, 2003), http://frwebgate.access.gpo.

gov/cgi-bin/getdoc.cgi?dbname=108_house_hear

2. As reported by Freddie Mac, http://www.fred

ings&docid=f:92231.wais.

diemac.com/pmms/pmms30.htm.

13. Ibid.

3. Roberto Cardarelli et al., "The Changing Hous-

8